Non-Linear Transaction Costs Inclusion in Mean-Variance Optimization

Non-Linear Transaction Costs Inclusion in Mean-Variance Optimization

In this article we propose a new way to include transaction costs into a mean-variance portfolio optimization. We consider brokerage fees, bid/ask spread and the market impact of the trade. A pragmatic algorithm is proposed, which approximates the optimal portfolio, and we can show that is converges...

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Bibliographic Details
Main Authors: Christian Johannes Zimmer, José Euclides de Melo Ferraz
Format: Article
Language:English
Published: Brazilian Society of Finance 2005-12-01
Series:Revista Brasileira de Finanças
Subjects:
portfolio optimization
transaction costs
bid-ask spread
market impact
Online Access:http://virtualbib.fgv.br/ojs/index.php/rbfin/article/view/1150
Description
Summary:In this article we propose a new way to include transaction costs into a mean-variance portfolio optimization. We consider brokerage fees, bid/ask spread and the market impact of the trade. A pragmatic algorithm is proposed, which approximates the optimal portfolio, and we can show that is converges in the absence of restrictions. Using Brazilian financial market data we compare our approximation algorithm with the results of a non-linear optimizer.
ISSN:1679-0731
1984-5146

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